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A Proposal of Monetary Reform for Argentina: Flexible Dollarization

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A Proposal of Monetary Reform for Argentina: Flexible Dollarization SUBSCRIBE NOW AND RECEIVE CRISIS AND LEVIATHAN* FREE! “The Independent Review does not accept “The Independent Review is pronouncements of government officials nor the excellent.” conventional wisdom at face value.” —GARY BECKER, Noble Laureate —JOHN R. MACARTHUR, Publisher, Harper’s in Economic Sciences Subscribe to The Independent Review and receive a free book of your choice* such as the 25th Anniversary Edition of Crisis and Leviathan: Critical Episodes in the Growth of American Government, by Founding Editor Robert Higgs. This quarterly journal, guided by co-editors Christopher J. Coyne, and Michael C. Munger, and Robert M. Whaples offers leading-edge insights on today’s most critical issues in economics, healthcare, education, law, history, political science, philosophy, and sociology. Thought-provoking and educational, The Independent Review is blazing the way toward informed debate! Student? Educator? Journalist? Business or civic leader? Engaged citizen? This journal is for YOU! *Order today for more FREE book options Perfect for students or anyone on the go! The Independent Review is available on mobile devices or tablets: iOS devices, Amazon Kindle Fire, or Android through Magzter. INDEPENDENT INSTITUTE, 100 SWAN WAY, OAKLAND, CA 94621 • 800-927-8733 • [email protected] PROMO CODE IRA1703 A Proposal of Monetary Reform for Argentina Flexible Dollarization and Free Banking F NICOLA´ S CACHANOSKY AND ADRIA´ N O. RAVIER Any system which gives so much power and so much discretion to a few men that mistakes—excusable or not—can have such far reaching effects is a bad system. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an “independent” bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers. —Milton Friedman, Capitalism and Freedom The Need for Institutional Reform nce again Argentina is experiencing a serious institutional and economic crisis. A centerpiece of the economic imbalance is the weakness and O untrustworthiness of its monetary institutions, manifested by high inflation and currency devaluation. We acknowledge that the economic and social problems Nicola´s Cachanosky is an assistant professor in the Department of Economics at the Metropolitan State University of Denver. Adria´n O. Ravier is a professor and research fellow in the School of Business at University Francisco Marroquı´n. The Independent Review, v. 19, n. 3, Winter 2015, ISSN 1086–1653, Copyright © 2015, pp. 397–426. 397 398 F NICOLA´ S CACHANOSKY AND ADRIA´ N O. RAVIER currently affecting Argentina extend beyond monetary policy. The monetary reform that we offer here should not be understood as a sufficient measure to end the recur- rent economic problems in Argentina but as a useful step in that direction. Our plan is an update of the monetary reform for Argentina proposed by Steve Hanke and Kurt Schuler (in Hank and Schuler 1999a, 1999b; Hanke 2001; Schuler and Hanke 2002), with insights from George Selgin’s proposal for the United States (1988, chap. 11). Briefly, our proposal, which closely follows Hanke and Schuler’s, is that the central bank be eliminated as the monetary authority and that the Argentine peso (ARS) be eliminated as the country’s national currency. The central bank should change all ARS into U.S. dollars (USD), but no restric- tions should be imposed on the use of other currencies to negotiate contracts. Hence, the term flexible dollarization: the country would not be tied to the USD but freed from the ARS. In other words, Argentina should unilaterally dollarize rather than enter into a bilateral agreement with the U.S. Federal Reserve. In addi- tion, commercial banks should be allowed to issue their own banknotes. As discussed later, this second aspect of the reform has financial and macroeconomic benefits. The fact that the Central Bank of the Argentine Republic (BCRA) is unable or unwilling to efficiently manage the supply of currency is—or should be—undisputed. Argentina currently has one of the highest inflation rates in the world, yet the highest-ranking authorities of the BCRA and national government publicly deny that mismanagement of the money supply is the cause of prices increasing at annual rates of 25 percent or higher.1 In addition, in 2012 the representatives of Congress approved a reform to the Carta Orga´nica,orBCRALaw,thatfreed the central bank from its responsibility to preserve the Argentine currency’s purchasing power; instead, the BCRA’s new mandate is to promote, to the extent of its ability and within the bounds of national government policies,mone- tary stability, financial stability, employment, and economic development with social fairness.2 Politicians’ disdain for the inflation issue (and their fear of political conse- quences if they openly admit responsibility) is not limited to the BCRA. The National Institute of Economic Census (INDEC) has supplied unreliable inflation estimates since at least 2007, which in turn has affected the calculation of other key economic indicators, such as gross domestic product (GDP) and poverty. The World Bank and The Economist are two examples of reputable institutions that have stopped publishing economic data from Argentina. A ruling class that is 1. According the latest available data from the National Congress, the inflation rate in Argentina between April 2013 and April 2014 is estimated to be 39.5 percent (see “Indices” n.d.). This is the highest twelve-month inflation rate since January 2003. (Congress makes available to the public a composite of private estimations of inflation every month. “Indices” n.d. provides those estimations. As mentioned below, INDEC Argentina’s Bureau of Economic Analysis is not reliable; the numbers provided by Congress are used now.) 2. See Article 3 in “Ley 24.144: Carta Orga´nica del BCRA” 2012. THE INDEPENDENT REVIEW APROPOSAL OF MONETARY REFORM FOR ARGENTINA F 399 uncommitted to basic monetary management should not be permitted to main- tain a central bank that allows itself to be a political tool of government officials. The present monetary weakness in Argentina is arguably a reflection of the country’s history of monetary mismanagement. From the BRCA’s foundation in 1935 to 2013, Argentina had a compounded equivalent yearly inflation rate of 50 percent. This means that 4.58 Â 1014 ARS in 2012 had the same purchasing power as one ARS in 1934.3 This is not the result of hyperinflation in the late 1980s; rather, it is the result of a chronic inflationary problem. During the seventy- seven years of monetary management by the BCRA, Argentina’s inflation rate has been lower than 10 percent in only twenty-three years and lower than 5 percent in only seventeen years. An inflation rate lower than the 2 percent level—which any serious central bank would consider to be an acceptable benchmark—was achieved in only eleven years.4 For twenty-one of those years, inflation was higher than 50 percent. Argentina has removed thirteen zeroes from its unit of account through various currency denomination exchanges since the foundation of the BCRA. We think that the absence of strong and sound monetary institutions in addi- tion to the lack of interest by policy makers in defending the BCRA’s independence are compelling reasons to consider a radical reform of Argentine monetary institu- tions. We also believe that the argument that Argentina should not surrender its central bank and monetary-policy “sovereignty” because a “better policy can be put in place” is, in light of Argentina’s historical performance and policy makers’ behavior, an exercise in wishful thinking. The proposal presented here does not address all of the small and technical details that would be necessary for the implementation of monetary reform. Rather, it addresses the general themes, problems, and objections relating to flexible dol- larization and free banking in Argentina. It is worth mentioning that there is no such thing as the perfect monetary institution, and every monetary arrangement suffers from shortcomings. The pro- posal presented here is no exception. However, it is unwise to make the inevitability of imperfections the enemy of improvement. If imperfections were enough to dis- miss any monetary institution, then the BCRA should be rejected with much more urgency than our proposal. We present our proposal as follows: the first section discusses the pitfalls of the convertibility law put in place between 1991 and 2002 and presents an over- view of the present economic situation; the second section discusses the need for a balanced budget as a prerequisite of monetary reform; the third section discusses the various aspects of our proposal; the fourth section responds to potential objec- tions to our proposal; and the final section offers concluding remarks. 3. In other words, 458,000,000,000,000 ARS in 2012 equals only one ARS in 1934. 4. As indicated in Reinhart and Rogoff 2009 and by private inflation estimates issued by opposing members of the National Congress (for 2007 to 2012). VOLUME 19, NUMBER 3, WINTER 2015 400 F NICOLA´ S CACHANOSKY AND ADRIA´ N O. RAVIER Recent Argentine Economic History: Was the BCRA a Currency Board during the Convertibility Era (1991–2002)? Although some describe the convertibility of the ARS between 1991 and 2002 as a currency board system, a distinction between orthodox (strong) and heterodox (weak) currency boards should be made. An orthodox or strong currency board ties the central bank’s hands to avoid monetary policy mismanagement, whereas a heterodox or weak currency board leaves room for the central bank to con- duct monetary policy. During the convertibility era, the BCRA was under a weak currency board regime.
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